Arbitration: See you all in court

In his article “Join the Rebellion”, Tony Bingham calls for an arbitration revolution. Specifically, he wants a lawyer-free, cheap, fast and commercial system of arbitration, aimed mainly at disputes involving sums of less than £25,000. He also calls on those drafting contracts, including the JCT, to put arbitration in front of litigation as the preferred form of dispute resolution.

Whatever one thinks of Tony’s position (and surely everyone has a right to instruct a lawyer if they lack confidence in presenting a case) there is one major problem: arbitration is essentially a two-party mechanism.

Of course, when setting up their contracts at the start of a project, employers and main contractors will fervently hope not to get involved in disputes with even one other party, let alone two or three. But it is a fact of construction that employers often make a claim against designers or project managers, who then blame the contractor - who, in turn, points the finger back at the designer or project manager. Similarly, a main contractor often has to bat away a claim from one subcontractor onto another. Arbitration is not suited to this scenario.

Until 1997, this was not so much of a problem. If someone was unfortunate enough to find themselves in a dispute with more than one party, and wanted to bring all the separate disputes before one tribunal for a decision, the courts would often allow that to happen - even if one of the parties wanted to rely on an arbitration clause in its own contract. The leading decision was Taunton-Collins vs Cromie. Here, the employer, an individual house owner, discovered defects in the guttering and walls of his house and, after taking advice, decided that it was his architect that should be sued. The architect blamed the contractor for not carrying out his design properly, so the owner brought the contractor into the proceedings, in order to cover its position.

The contractor, however, protested that its building contract contained an arbitration clause and asked the court to stop the proceedings. The Court of Appeal refused to do so, saying that it would be undesirable to have linked disputes decided in two separate proceedings, with potentially inconsistent results.

Following that case, the courts commonly overrode arbitration clauses in the interests of bringing all the warring parties together in one place - the court. Unfortunately, this changed in 1997, when the Arbitration Act 1996 came into force. The act said that if a contract contained an arbitration clause, either party could insist on using it. The courts could not intervene, even if this led to part of the dispute being decided in court and another part being decided separately by an arbitrator. The reason for the change was the need to comply with European law.

This created a headache for drafters, especially those representing employers and main contractors. While it is theoretically possible to structure the contracts on a project so that they all contain identical arbitration clauses, with provision for consolidation of any proceedings, this is not easy. Also, arbitration simply does not contain the tools needed to run multi-party actions, nor are arbitrators experienced in such actions. Conversely, High Court judges deal with multi-party disputes every day of the week.

This is not to say that arbitration clauses should never be used. But anyone agreeing one needs to be aware of the risks if a dispute ends up involving other parties.

The problem outlined above is not the only reason why arbitration clauses have fallen out of favour over the past 15 years or so, at least in domestic construction contracts. Shortly after the 1996 act came into force, arbitration found itself squeezed between adjudication, which offered a cheap and speedy solution, and a much-improved Technology and Construction Court, with its emphasis on speed, control of costs, and a requirement that parties consider mediation.

Arbitration can do something about the challenges of speed and cost, and indeed Tony’s idea of fixed-fee arbitrations for small disputes has some merit.

But the risk of multi-party disputes will continue to cause drafters to pause before committing themselves to arbitration clauses. Unless the law changes - which seems highly unlikely - Tony’s revolution may have to wait.

Ian Yule is a partner in Shakespeares